Monday, August 27, 2012

As I've noted in prior posts (and many others have noted as well), there is strong if indirect evidence supporting the surmise that Romney - wearing his Bain hat, rather than acting as a lone wolf - may have engaged in a lot of aggressive and legally questionable tax planning in recent years, including (1) aggressive structuring to convert ordinary income management fees into capital gain shortly before they accrued, (2) using total return equity swaps to avoid the U.S. withholding tax on dividends paid to Caymans entities, (3) mysteriously acquiring a huge gob of foreign tax credits in 2008, and (4) using aggressive under-valuation to transfer valuable assets to his sons and his IRA without getting hit by gift taxes or contribution limits.

Keeping in mind that the practices here were widespread among high-flying financial sector people, I've gotten the question: Why did the IRS allow this stuff to happen, given that often (albeit depending on the particular facts) it was so legally questionable?

There are several likely answers to this. When it comes to these sorts of things, the IRS and Treasury are under-staffed, often are behind the curve regarding what is happening on Wall Street, may be subject to political influence regarding overall audit and regulatory priorities, and also may very reasonably have concluded that they had higher-priority fires to put out first. For example, there is no doubt that the IRS and Treasury, albeit initially slow off the mark, eventually put a great deal of effort into addressing abusive tax shelters that involved ginning up huge fake losses with little or no economic substance, through marketed deals that typically had nothing to do with the taxpayer's actual business. This was not only relatively easy to do (both in terms of getting taxpayer lists and winning the actual cases) but was an urgent high priority. By contrast, even once the government understood what sorts of games people on Wall Street were playing to minimize tax liability, attacking it was bound to be hard work with only a more limited payoff. For example, these techniques really were limited to people at the top, whereas marketed tax shelters can extend much further down, and each case might turn on its particular facts and circumstances (whereas, say, Son-of-BOSS cases were generally all the same).

Of course, this is not to let the IRS and Treasury entirely off the hook. They probably should have been much more active in issuing shot-across-the-bow notices and rulings, giving examples of aggressive tax planning transactions that do not work. (An example is the 2010 ruling about total return swaps that I mentioned in a prior blog post, which ought to have been issued years earlier.) Once something becomes common practice and has not been challenged over a period of years, putting the toothpaste back in the tube can be quite difficult.

But to be sure, all this is easy for me to say, sitting at my law school desk in 2012. The press of daily events and the "fog of war" can make it more difficult in real time.

Plus, of course, the "audit lottery" is inevitably pervasive. Even for that tiny percentage of taxpayers that actually does face at least a minimal audit, the IRS may frequently fall short of spotting all or even many of the key issues that full knowledge would have suggested pursuing.

What do we learn from the standpoint of tax law design? Although I consider the foreign tax credit over-generous, and although capital gains do indeed get a lower tax rate than ordinary income (reflecting that taxpayers often find it easy not to realize them), the tax planning at issue here generally has less to do with the enactment of special tax preferences by Congress than with basic structural soft spots in the body of our income tax system. For example, the questions of who owns a particular asset, what exactly is its value at a given point in time, and whether a given transaction has economic substance and/or is subject to meaningful downside economic risk - all variously at the heart of the four tax planning tricks that I referenced above - are inherently hard to answer, especially given taxpayers' inevitable information advantages regarding their own detailed circumstances.

Neither presidential campaign has proposals out there that would address these basic problems (although one side might be less unlikely - albeit very far from certain - to countenance expanded enforcement with regard to the financial sector's tax planning fun and games). The issue here is less tax reform, in the standard sense of broadening the base, than either shifting to a progressive consumption tax or else, perhaps, having a much more mark-to-market-based income tax.

Friday, August 24, 2012

Here's Vic Fleischer on a management fee conversion trick that Bain appears to have done, and that many reputable tax lawyers believe is bogus and could not withstand legal challenge.

And here's James Stewart in the New York Times (to appear in the Saturday print edition tomorrow), quoting me in re. why Romney's high foreign tax credit for 2008 - a sharp outlier relative to his credits in adjoining taxable years - raises strong suspicions that he did some sort of a tax shelter transaction in that year involving the effective purchase of credits with minimal economic substance.

My statement in the article that Romney's big foreign tax credit in 2008 "makes no sense to me at all" relates to the point that high foreign taxes are incredibly easy to avoid if you have passive income and/or access to Bain's extremely aggressive and complicated tax planning technologies. For example, all those Caymans entities create huge opportunities to avoid any significant foreign taxes, even with associated operations in countries that have income tax systems.

So I find it hard to believe that the Bain investors actually paid significant foreign income taxes in 2008 - and not just because this seems to have been a once-only extraordinary event. Rather, it appears far more plausible to me that they did one of those fake off-the-rack deals that the IRS generally challenges. Admittedly, taxpayers sometimes win these cases, requiring legislation to shut down foreign tax credit-generating tax shelters. But in general the government has done very well in anti-tax shelter litigation over the last five to ten years.

I am quoted in the article as saying that I consider the foreign tax credit hugely over-generous (which doesn't necessarily mean that tax burdens on U.S. companies' foreign source income should be higher - just that the statutory rate, rather than the credit, should be used to create the desired burden level). But it is true that, when you actually bear foreign income taxes that are creditable, you are not actually benefiting. Thus, suppose we conclude that the U.S. should not provide 100 percent reimbursement (via the credit) for income taxes that a U.S. company pays to Germany, because this eliminates the company's incentive to try to reduce German taxes (which from the U.S. national standpoint are purely a cost, as we don't get the money as we would from our own tax collections). Even though, in this setting, I would call the foreign tax credit over-generous, the taxpayer isn't getting away with anything, because paying a dollar of income tax to Germany costs you just as much as paying it to the U.S.

But if Bain, as I strongly suspect, acquired its 2008 foreign tax credits through some sort of super-aggressive tax shelter transaction, this scenario would not hold. The whole point of abusive tax shelters involving foreign tax credits is to get the credit without actually bearing the foreign tax cost.

Here is an example that would not actually work (or even come close) as a matter of U.S. income tax law, but that captures the economic heart of what these transactions do. Suppose that I were allowed unlimited foreign tax credits whenever I made any income tax payment to a foreign government, even if it wasn't actually my tax liability. Now suppose that J.K. Rowling came to me and said, "I owe the U.K. government $10 million of income taxes this year. But I will pay you $5 to pay this entire liability for me."

End result before U.S. tax: J.K. Rowling pays me $5, and I pay the U.K. government the $10 million that she would otherwise have paid. But if I can claim foreign tax credits for this full amount, the U.S. government gives me back the $10 million, and I end up ahead by $5 (minus the U.S. tax on that amount). So U.S individuals as a whole, via the effect on federal income tax receipts, lose $9,999,995.

Again, this transaction would not even come close to working under U.S. federal income tax law. But its bottom line is economically similar to the types of sham deals that I suspect Bain may have done in 2008. And if such deals could have been successfully challenged, then Romney may not have paid all the U.S. federal income taxes that he legally owed.

As usual, I feel half-apologetic about the degree of speculation that I am engaging in here. But it's Romney's unprecedented tax return secrecy, and the inferences reasonably derived from it, that makes such speculation necessary.

Thursday, August 23, 2012

Another topic that's been getting attention on the campaign trail is the Romney campaign's insistence that the Obama Administration imposed a $700 billion Medicare cut in order to finance healthcare reform. Some attention has gone to the comically overt hypocrisy of this claim, given both that Congressman Ryan supported exactly the same cuts until he was named the VP nominee-designate, and that the Republicans apparently are planning capped-growth voucherization of Medicare.

But another part of the story here is that the $700 billion in Obama Administration cuts were not directly on seniors' benefits, but rather were on payments to Medicare providers. To make the distinction clear, suppose we have two alternative sets of Medicare changes. Under the first, seniors must pay $700 billion more than previously (via co-payments, annual charges for Medicare coverage, etc.) for particular services. Under the second, seniors pay the same as previously, but healthcare providers' reimbursements are slashed by $700 billion.

Under the Romney campaign's approach, both of these changes would be described as a $700 billion Medicare cut. But they are obviously quite different. The direct incidence of the first change falls on seniors, while the direct incidence of the second change falls on healthcare providers.

Okay, another term for direct incidence is "nominal incidence." For example, the nominal incidence of the Social Security payroll tax is 50% on the employee, 50% on the employer. Economists generally agree, in this setting, that this split of the nominal incidence has no long-term effect on the true economic incidence of the tax (i.e., who really bears it economically, in the sense of ending up with less money). As it happens, workers are generally thought to bear pretty much the full economic incidence of the Social Security tax, even though the nominal incidence is split 50-50 with the employer.

Does this reasoning apply in the Medicare case as well, and show that the Romney campaign is correct to treat the direct or nominal incidence of Medicare cuts as irrelevant? In a word, no.

The main reason for this is the difference between short-term and long-term incidence. Consider the payroll tax "holiday" that we have had for the last couple of years. The nominal incidence was to benefit the worker (i.e., their payroll tax liabiliies, rather than those of the employers, were reduced by the holiday). But this probably did place a much larger share of the tax cut into their pockets, rather than into the employers' pockets, given that it would take time for wages to adjust in such a way as to make it all the same in the end.

For the same reason, even if the long-term incidence of the corporate tax falls on workers rather than either on shareholders or an investors generally, an unanticipated overnight repeal of the U.S. corporate tax would confer a windfall gain on shareholders. Their stock would immediately gain value from eliminating the expected corporate tax liabilities, and only over time would it all wash out via investment changes.

In the Medicare setting, this "transition" point is extremely important. The healthcare sector is characterized by massive sunk cost investment, whether we're looking at a medical research and technology firm, or at a 40-year-old doctor who is not realistically going to change his profession. So there is a huge difference, persisting for many years, between the economic incidence of (a) giving healthcare providers less and (b) making seniors pay more.

What's more, since the healthcare sector is experiencing an unsustainable growth rate that we know will need to be addressed at some point, it is already clear that some combination of (a) and (b) will have to be enacted over the long run. And when you take something out of one side's hide today (relative to the prior state of the law), you are not necessarily affecting the manner in which the two sides would be expected to split the impact of future necessary retrenchments.

In sum, we have here a case where the seemingly "naive" view, that nominal incidence is the same as true economic incidence, actually does pretty well as a shorthand description of what is happening. Hence, the Romney campaign is being extremely misleading, and not just hypocritical, when it claims that the Obama Administration has imposed a huge hit on seniors via the $700 billion in Medicare cuts.

While press and blogosphere attention is rapidly focusing on Gawker's very interesting (but massive) Bain document drop, I am not sure how much time I will have to join in the fun. There are a lot of documents there, and while I am confident they contain some very interesting nuggets, these are likely to require a broader context (e.g., comparing them to other public information). Plus, I am just back from vacation, I'm trying to finish a chapter of my international tax book, my first fall class meets 8 days from now, various other things that take my time are coming up over the next few weeks, etcetera, etcetera. I know, cue the violins - it's not so terrible, but it may indeed keep me from digging in very much. Hopefully others will make up for my shirking. (I won't name names, but certain people at Tax Notes and at particular West Coast law schools come to mind.)

In any event, Gawker is off to a nice start, by noting such details as the Bain entities' use of total return equity swaps, apparently or at least possibly to support owning dividend-paying U.S. stocks as an economic matter while claiming not to own them for U.S. federal income tax purposes. An example of such a swap would be as follows. Suppose I think GE stock would be a good investment, but I don't want to own it for tax purposes because the Caymans entity through which I am investing would owe withholding tax on any dividends that GE paid. So I arrange a swap with a bank that has the following terms. One year from today, it will pay me the interest that I would have owed it on a $100 million loan. It will pay me an amount equal to the dividends that I would have derived during the same year had I owned $100 million of GE stock. In addition, it will pay me the amount by which $100 million of GE stock appreciated during the year (or I will pay it a similarly determined amount if GE's stock price goes down). The bottom line is that, counter-party credit risk aside, this is economically equivalent to borrowing $100 million at the specified interest rate in order to hold $100 million of GE stock for a year.

This use of total return equity swaps, such as to avoid the U.S. dividend withholding tax, was very widespread for more than a decade, and may not be dead yet, although the IRS issued a shot-across-the-bow Notice concerning the practice in 2010. But taxpayers who engaged in it to avoid the dividend withholding tax were coming perilously close to committing tax fraud, in cases where the economic equivalence to direct ownership was too great. (For example, in a lot of these deals even the exact timing of dividend payments had to be replicated in the swap.) Given that considerations of economic substance are relevant to ownership determinations for U.S. federal income tax purposes (i.e., "tax ownership"), the only leg that taxpayers had to stand on in some of these cases was common practice and the apparent lack of IRS enforcement (not a very strong leg if the correct application of the law was clear).

How far out on the limb were Bain-affiliated foreign entities that were making money through total return equity swaps, and claiming not to owe U.S. withholding tax? And what should we make of this, for purposes of the presidential campaign, if what they were doing, while legally dubious, was common practice? Fair questions for discussion, I'd say, and good examples of why Gawker is performing a valuable public service here.

Wednesday, August 22, 2012

The schedule for the NYU Tax Policy Colloquium at the beginning of the next calendar year is now pretty much set. (The weasel words "pretty much" refer to the fact that often something ends up having to change.) All sessions will be on Tuesdays from 4 to 6 pm, in Vanderbilt Hall, room 208, at the NYU Law School, and they are generally open to the public, albeit off-the-record for press.

Anyway, the schedule is as follows:

1. January 22 – David Kamin, NYU Law School

2. January 29 – Edward McCaffery, USC Law School

3. February 5 – Jake Brooks, Georgetown Law School

4. February 12 – Lilian Faulhaber, Boston University School of Law

5. February 26 – Peter Diamond, MIT Economics Department

6. March 5 – Darien Shanske, University of California at Hastings College of Law

7. March 12 – Dhammika Dharmapala, U. of Illinois Law School

8. March 26 – Sarah Lawsky, University of California at Irvine Law School

Tuesday, August 21, 2012

Yesterday's Huffington Post article by Zach Carter and Jason Cherkis, "Mitt Romney Taxes Enriched Foreign Governments at U.S. Expense," opens a new frontier in the ongoing efforts to understand more fully both the limited tax return information Romney has published, and the reasons for his unwillingness to release anything else.

In particular, the article notes that Romney had high foreign income in the years 2005-2008 (but apparently not to a similar degree in the immediately preceding and following taxable years), and that in 2008 he generated almost $800,000 in foreign tax credits, some of which was carried forward to subsequent taxable years as in excess of U.S. foreign tax credit limits.

One angle on this would be the populist job creator rhetoric about why is he investing abroad rather than here (or is this just sourcing games and shell corporations in tax havens), why is he paying foreign tax credits rather than U.S. taxes, etc. But while that angle may be politically resonant, it's not the one of particular interest to me.

As my recent and forthcoming work on U.S. international tax policy discusses, I consider the foreign tax credit (FTC) a bad rule, from a U.S. national welfare standpoint, because, up to the FTC limit (which applies when you have eliminated all US tax liability on your foreign source income), it permits the taxpayer to treat a dollar of foreign taxes paid as just as good as a dollar of U.S. taxes paid. I consider this a policy error on our part. But I would agree that there is nothing even remotely unethical about a U.S. taxpayer, even one who is running for president, paying foreign taxes and then claiming the FTC to zero out the U.S. taxes that he would otherwise owe.

But is that's what going on here? I am frankly mystified by and suspicious about the high foreign tax liabilities that Romney apparently claimed on his (still secret) 2008 federal income tax return. Keep in mind, this was a guy with lots of passive investment income abroad, generally run through tax havens such as the Cayman Islands. Why was he paying significant foreign taxes, when seemingly they would have been so easy for him to avoid? (Note: While, at Romney's income level, $800,000 may not sound like a lot of taxes, it apparently was high enough to exceed the U.S. tax due on the associated income, even though the U.S. has an unusually high marginal tax rate. So the claimed effective tax rate on the foreign source income seems surprisingly high.)

The natural suspicion is that he may conceivably have been engaged in questionable or even downright abusive FTC-generating transactions, rather than actually economically bearing high foreign taxes. As noted in the Carter-Cherkis article, there have been a lot of dubious transactions in recent years that permit multiple taxpayers to claim the same foreign tax credits, or the same multinational group to credit the same taxes multiple times, or that involve taxpayers' claiming FTCs that they are not actually bearing in any economic sense, or that involve their in effect "buying" someone else's unusable foreign tax credit claims without requiring them to include the associated income, etcetera. And these transactions often are shams, subject to attack by the IRS based on standard anti-tax shelter doctrines relating to economic substance and business purpose.

Against the background of ongoing secrecy plus what we know of his embrace of aggressive tax planning strategies, it is certainly plausible that Romney both could and would have done things like this. So he may not actually have borne high foreign taxes in lieu of U.S. taxes - which would have been well within the rules but wouldn't have benefited him economically - but, rather, may have engaged in tax planning games in order to avoid bearing significant tax burdens anywhere, possibly through deals like those that the IRS has considered questionable in other settings.

It's unfortunate that this entire discussion must be so speculative and hypothetical. No one really knows why the high foreign tax credits popped up in Romney's 2008 return (and we only know they did due to a form buried deep in the middle of his 2010 return). But when you keep secrets about your own recent financial dealings even though you are running for president, and when you reject norms of broader disclosure that have been standard practice for decades, you can't rightly complain about efforts to find logical explanations for seeming anomalies.

Thursday, August 16, 2012

Romney has now been quoted as saying that he has "never paid less than 13%" in taxes, by which he presumably means federal income taxes. Unfortunately, this statement is meaningless, because of the question: 13% of what?

Suppose that in a given year he got $20 million in capital gains from Bain carried interest payouts and such, and had $3 million in ordinary income (from fees, interest, dividends, etcetera). But suppose further that he deducted $2 million in fake ordinary (i.e., not capital) losses from tax shelter transactions, along with $19 million in capital losses from "strategic trading / loss harvesting" (the sale of down stocks from his portfolio, while he continued to hold the appreciated stocks), as well as from additional tax shelters that created fake (not merely selectively realized) capital losses.

His adjusted gross income (AGI) would be $2 million - not $23 million, even if the higher amount was a more accurate representation of his economic income for the year. And with this being half ordinary income, half capital gains, he could well end up paying 13% or higher, even with itemized deductions to create taxable income that was less than his AGI.

Suppose he ended up paying $300,000 of taxes. This would satisfy his 13% claim even if we assume that he is using AGI, not taxable income, as the denominator. But if we compared the taxes paid to the full $23 million that he really earned for the year (even not counting unrealized asset appreciation that the tax system generally ignores), it would come out to not much over 1%.

In short, even if Romney is technically telling the truth here, there is absolutely no reason to believe that his claim has any meaningful content.

I read John Taylor's response to Krugman, and found it pretty feeble and limited. But how would these guys actually defend themselves publicly, if they faced no political constraints?

From conversations I've had with people other than HHMT themselves, I suspect that they believe that a Romney Administration would end up following a set of unannounced policies (some, to a degree, hinted at) that are political poison, but that they believe Republican Party discipline would enable them to push through. An example is quite dramatic scaling back of the home mortgage interest deduction and employer-provided health insurance exclusion. People on the left keep saying: Because these things are political poison, and because you dare not even more than hint at them now, we know that they will never end up being passed.

But conservative economists for Romney may sincerely believe that this seemingly well-founded skepticism is incorrect. Again, if the Republicans have House and Senate majorities, and if they act like a purely parliamentary party led out of the White House, and if they use the tools at hand to squelch any Senate filibuster, then they can pass whatever they like in January 2013. Perhaps they even think that they would be able to replace the income tax with a consumption tax (!!). Then it's almost 2 years to the next election, and if the economy improves in the natural course of things they can take the credit (whether rightly or wrongly) and cruise on forward from there.

I don't agree that this would actually happen. While the Republicans will indeed, if placed in this position, make damn sure that the filibuster doesn't cause them any difficulties, I don't think they'll take White House direction. Nor would even a Romney White House be willing to attack politically popular tax preferences as much as the economists might hope (and perhaps have been told) that it would. So I would expect Medicaid cuts, budget-busting tax rate cuts at the top, and perhaps deferred tax preference cutbacks that will never end up taking effect as more than minor nicks.

Of course, even if a Romney White House did what the more principled conservative economists may expect and hope, the TPC study's critique would remain on point, since it is straight arithmetic. So the result would be a huge upward after-tax-and-transfers wealth transfer, privately rationalized by the more sincerely policy-minded on the belief that, within 10 years, a riding tide would lift all boats, plus on the view that accidents of the business cycle will permit them to take long-term control of the policy process, public opinion on particular issues notwithstanding.

Tuesday, August 14, 2012

Although I have been off the Web, far more than on it, during this stage of my vacation in Costa Rica, I have been able to follow the controversy over the "HHMT" article, if that's the word for it, that the Romney campaign disseminated in support of their tax, economic, and budget policies. Krugman and DeLong have stated it strongly, albeit in my view appropriately so.

Readers of this blog are unlikely to be surprised by my conclusion that this was not a good piece of work - although you really don't need my opinion, when the author of almost every article they cited has stated publicly that their citations were out of context at best, and if not unrelated then directly contrary to the conclusions that HHMT claimed could be drawn.

I happen to be on friendly terms with 2 of the 4 authors of HHMT - a third one I have exchanged emails with once or twice, and the fourth I don't know personally at all. So there are some personal ties that I care about here. I also generally have high respect for their academic work.

What disappoints me is that they appear to have made the judgment that the reputational cost of signing this piece (which falls below the standards they honor in their academic work) was worth bearing. They are all grown-ups, and if all that was involved was the reputational hit versus the benefit they see to helping the Romney campaign and/or aiding the ultimate adoption of policies that they believe in and/or showing their loyalty, that is a call that (absent further effects) they are fully entitled to make.

But there is an externality problem here. Their issuing the piece moves towards changing the acceptable standard for academics working in a campaign, and in quite a bad way. It hurts academics' reputation over the long run, and it cheapens public discourse, by making it harder for people who are not in the know to figure out what the issues and accepted lines of plausible debate actually are.

In the 2008 presidential campaign, I criticized Doug Holtz-Eakin for occasionally making public statements, seemingly with his economist hat on, that he could not have believed were true, and that are better left to the hacks that every campaign inevitably employs. (Oddly, he also frequently made very frank public statements that I wouldn't have blamed him for clamming up about instead.) But he only crossed the line (as I see it) via statements to the press, often seemingly off the cuff, as distinct from via short papers with footnotes to the academic literature.

Here's hoping that HHMT conclude that it was a bridge too far this time, and that they should be more careful next time, both for personal reasons and principled ones. They should keep in mind that principle is about more than furthering the adoption of your principles.

Saturday, August 11, 2012

It is certainly 100% fair to say that the Ryan plan would "end Medicare as we know it." A tightly capped voucher program simply isn't the same thing, even if you still call it "Medicare.". Likewise, though this admittedly is a much further stretch, repealing all healthcare for seniors but expanding midnight basketball programs "Medicare" wouldn't mean the program hadn't been repealed.On the other hand- and there definitely is an "on the other hand" here - the slowed growth that the Ryan plan at least ostensibly makes explicit are baked into the math of inevitable retrenchment in the ate of healthcare expenditure growth compared to GDP. The Obama approach, while clearly within "Medicare as we know it," involve a similarly reduced growth rate by different means.So it admittedly isn't fair to tag the Ryan plan with the fact that the rate of healthcare expenditure growth must slow.By the way, each side rightly points out that the other can't really "show us the money" re. The actual credibility of its claim that the rate of healthcare expenditure growth will slow. For the Obama side, it goes to the success of the apparatus to slow growth, raising issues of both how it works in the field and of political resolve. For the Ryan plan, it's straight political resolve, as in: Why should we believe future Congresses will be willing to hold the line when Ryan himself won't do so in the short-term budget?Medicaid is another matter. The Republicans appear quite willing to shred this program, although it may turn out to have widespread political support extending to their own voters.

I am giving a talk at the U of Illinois Law School next March, at an endowed lecture on retirement issues, where I will attempt to address the underlying philosophical differences in terms of political economy and inter- (as well as intra-) generational risk-sharing, with Paul Samuelson's famous model of Social Security playing a key role. I will be aiming for higher ground than current political spats. But clearly I will have to write it in lieu of whatever happens in this year's election.

Friday, August 10, 2012

Much ongoing controversy over the last couple of days re. the fact that Romney headed Marriott's Audit Committee in 1994, when the company did a $70 million Son-of-BOSS tax shelter.

The essence of the deal was: I pretend to pay you $70 million, you pretend to pay me $70 million (most of it just being fake circular cash flows of supposedly borrowed funds on paper), I claim that as a technical matter I can deduct the $70 million I "paid" and ignore the $70 million I "received." And i reject or ignore the undeniable application of anti-tax shelter doctrines (from Supreme Court cases decided in 1935 and 1960) requiring economic substance and business purpose, I cross my fingers and hope that the IRS doesn't figure it all out. If they do, I presumably have a fake opinion I paid someone good money to write for me, permitting me to claim bogus good faith. (Although, in fairness, non-tax lawyers may have thought this actually worked if they didn't get actual tax advice to double-check the promoters' canned opinions.)

Given the $70 million deduction Marriott was claiming, this would have implied claimed tax savings of almost $25 million (at a 35% corporate rate). It is plausible to me that deciding to do this would have been by far the single biggest issue that Romney's audit committee would have faced.

I can't say that he did see and understand the issues this way, and make the call to go the sleazy route of hoping the IRS would miss the issue, but this is indeed what would have had to happen if the Marriott audit committee was doing its job in a properly functioning process.

Thursday, August 09, 2012

I am currently on vacation in Costa Rica, with somewhat spotty Internet access but communicating by email with the States. Several reporters have contacted me, to discuss issues such as the Romney tax returns, and yesterday I was in contact with people representing Erin Burnett at CNN regarding a Huffington Post article by Ed Kleinbard and Peter Canellos a couple of days ago, concerning Mitt Romney's tax returns and attitude towards tax planning.

They criticized him with respect to Romney's role in 1994, on the Marriott board, concerning the company's decision to invest in a Son-of-BOSS tax shelter.

I've been in a sense uneasy about my Romney commentary over the months, despite 100% standing by it, for the following reason. I regard myself as a straight shooter, not a player in the game. I am opposed to Romney in the 2012 election (and I must say that I increasingly find myself, to my surprise, regarding him extremely negatively). But since this is in large part policy-based - although also reflecting what I see as his evasiveness and rank dishonesty - I feel as if it's all too convenient for me to find myself also criticizing his tax return behavior, as well as the secrecy that I consider a slap in the face to basic political principles of transparency and disclosure. But again, it's convenient to denounce all this stuff, given the political disagreement part, and I have always had an over-active conscience. (I can feel guilty when I am entirely innocent.)

I thus feel a need to dial it back occasionally, and to bend over backwards to be fair (e.g., with regard to the significance of his possibly having needed to file for an amnesty program in re. his Swiss bank account). I want not only others but myself to perceive me as being scrupulously fair.

Anyway, I was dismayed to have it brought to my attention that I have apparently been quoted at CNN as saying that, although Son-of-BOSS has become iconic as the most infamous abusive tax shelter in U.S. tax history, at the time (1994) perhaps its status was ambiguous.

The worst thing about this quote is that it's accurate and in context on CNN's part. But it's not factually correct about Son-of-BOSS even back then, and it's not what I actually believe. I was just bending over backwards to be fair and not too partisan, given that I don't know a lot of details about Romney's degree of involvement in and responsibility for what Marriott did in 1994. So I felt uneasy about blaming him too much or considering it too indicative of who he is (although it fits the narrative pretty darned well), without my first knowing more.

So I hereby retract what I was accurately quoted as saying. Even in 1994, no competent tax lawyer could in good faith have believed that Son-of-BOSS worked (although this may not have been obvious to anyone who was not a tax expert), and while I still don't know enough to fully judge his true role in all this, I would say that, if he was actively involved and competently advised, it would, in my view, have shown disgusting and immoral behavior on his part. (Plus there would be no reason to think that he has subsequently thought better of it.) But the predicates remain uncertain, at least to me.

Given what we still don't know, it's all the more important to see 10 previous years of tax returns. After all, 1997 through 2001 or so was the high water mark of people like him investing in abusive tax shelters that sent a lot of the promoters to jail. Did Romney, on his own tax return, invest in Son-of-BOSS and other abusive tax shelters, such as CDS (which is hinted at by his 2010 return), back in the day?

Lots of other experts keep on saying he was too smart to do this rotten stuff and thus must have paid some income tax each year. But, despite the uncertainty that he himself has created through his actions, I sure wouldn't bet the house on their being right.

Friday, August 03, 2012

The speakers, although not as yet the weekly schedule, are now set for next winter's NYU Tax Policy Colloquium, which I will be co-running with Bill Gale of the Brookings Institution and Tax Policy Center. In alphabetical order, they will be as follows:

1. Larry Bartels, Vanderbilt U. Dep’t of Political Science

2. Jake Brooks, Georgetown U. Law Center

3. Raj Chetty, Harvard Economics Dep’t

4. Dhammika Dharmapala, U. of Illinois Law School

5. Peter Diamond, MIT Economics Dep’t

6. Lilian Faulhaber, Boston U. School of Law

7. Brian Galle, Boston College Law School

8. Itai Grinberg, Georgetown U. Law Center

9. David Kamin, NYU Law School

10. Sarah Lawsky, U. of California at Irvine School of Law

11. Ed McCaffery, USC Law School

12. Leslie Robinson, Dartmouth Business School

13. Darien Shanske, U. of California at Hastings Law School

14. Alan Viard, American Enterprise Institute

We will be meeting on Tuesdays from 4 to 6 pm, from January 22 through May 7, but with no sessions on February 19 and March 19.

Thursday, August 02, 2012

Romney's Policy Director Lanhee Chen complains that the Tax Policy Center report exposing the regressivity of his tax plan "ignor[es] the reforms that would make America's corporations more
competitive by moving from the highest corporate tax rate in the
industrialized world to one that is comparable to our trading partners."

That is just silly. Suppose we agree that it is good policy to enact corporate tax reform that consisted of lowering the corporate rate and broadening the base. The argument for this is NOT that it would boost short-term economic growth. Indeed, if anything it would have the opposite short-term effect. The problem is that lowering the rate, even if good policy, consists in large part at enactment of a one-time windfall to old capital. After all, the earnings that companies reap this year are generally the fruit of past year's investment decisions - often with up-front deductions at the higher rates applying in past years. Meanwhile, the corporate tax preferences that reform would eliminate are generally targeted to new investment.

Another point: if you lower the corporate rate and broaden the base, causing the effective or average tax rate on corporations to be the same (as is implied by revenue neutrality), you don't necessarily attract new capital that would result in more jobs. (Even if you did, the process would be slow. These things take time.) One of the main things you ARE accomplishing by doing this is that you are increasing companies' willingness to report profits as arising in the U.S., rather than abroad. This may reduce the overall revenue loss, but it isn't about jobs.

Anyway, not to dispute that the corporate tax reform that Romney (as well as Obama) envisions might be a good idea. But to claim that it would have any significant effect on the TPC distributional findings, or create significant jobs in the short run, is ludicrous nonsense.

I guess this is public, since Wikipedia has it. Peter Orszag will be a Distinguished Scholar at NYU Law School during the upcoming academic year. Peter, who is currently vice chairman of global banking at Citigroup, recently served as the director of the Office of Management and Budget. He is truly a leading economic policy expert, whose interests include (without being limited to) healthcare, Social Security, and the federal budget, just to name a few. Among other things, he will participate at least occasionally in our Tax Policy Colloquium - at which he presented a paper on Social Security reform, some years ago, and also was a co-author of a paper on refundable tax credits that Lily Batchelder presented.

By the way, we have a pretty good lineup for the colloquium next year (late January through early May 2013, meeting on Tuesdays from 4 to 6 pm), and I will be able to post it shortly.

Perhaps I should try to resist the inclination to add an institutionally self-aggrandizing comment here about how all this only adds to NYU Law School's place as a leading national center for expert tax and related policy discussion, blah blah blah, etcetera. But I suppose you can consider the comment made, and I would certainly consider it justified.

The ongoing debate over the Tax Policy Center report that showed a tax increase for the bottom 95% of income taxpayers, along with gigantic gains at the top, if Romney's tax reform plan was enacted in accordance with its parameters (including revenue neutrality) is an interesting case study regarding the degree to which the actual truth content of claims ends up mattering in public political debates.

There is really no reasonable way to dispute that the TPC study is at least approximately correct regarding the distributional implications of the Romney tax plan, over the next few years, as it has been described. Of course, if Romney set forth a more detailed plan that differed from the TPC-assumed parameters, one would have to make an estimate as to that. But the bottom line would not change significantly unless the plan differed substantially from its announced parameters (large rate cuts, especially at the top, to be offset by base-broadening that attempted to restore some progressivity but that left alone certain investment related items such as the capital gains and dividend tax rates).

I happen to think that Romney wouldn't increase taxes on the bottom 95% to the extent suggested by the TPC study, but that is because I would expect him to explode the budget deficit instead of actually making the plan revenue-neutral. The TPC study is not in error by reason of its assuming that he would actually do what he says he plans to do. (And of course, what do I know about what they really would do? I am just guessing, like everyone else.)

So how does the Romney campaign respond? Mainly with shoot-the-messenger. These are "leftists," it's a "joke," etcetera, even though everyone knows that TPC is serious, capable, independent, and objective. (Indeed, as has been widely reported, the Romney campaign was happy to cite TPC studies of other Republican candidates' plans.)

Second, economic advisors to the Romney campaign claim that an avalanche of job creation means that the poor and middle class will benefit after all. Never mind that there is no plausible basis, in Romney's reported policy plans, for expecting any such thing. (By the way, it is possible that he might actually be planning to create much greater stimulus than he admits to, through unfunded tax cuts plus an orgy of military spending, perhaps with a new Middle East war thrown in, but that again gets us into speculation about unannounced plans.)

How could the Romney advisors, several of whom I know and respect from other, more academic contexts, live with themselves regarding the deception here? Several ways. First, politics ain't beanbag, and it is a business once you get personally involved. Second, while they must know that what the TPC study says is at least approximately true, they are less averse to these distributional outcomes than are policy types who are more to the left (or, if you prefer, less to the right). Third, they believe that, over a longer time frame, fully financed lower rates will indeed bring efficiency and productivity payoffs that eventually leave everyone better-off. This of course reflects that they tend to have a higher estimate of the efficiency and productivity gains than policy types who are to their left would generally have.

In sum, they consider the regressive results that are exposed by the TPC study to be genuinely worth it over the long haul. If you want to get to a better steady state (as they see it), you've got to start sometime. I happen to disagree with them, because I have different evaluations of both pieces (the short-term distributional cost, and the claimed long-term efficiency payoff). But this is all in the realm of reasonable disagreement.

Unfortunately, however, the actual case that they believe is too hard a sell for a heated presidential campaign. Thus, the Romney campaign must resort instead to shoot-the-messenger regarding the TPC study, plus ridiculous claims about short-term job creation. And this may well succeed in throwing enough dust over the indisputable (as in the old joke, "parties disagree on whether the Sun rose this morning") in order to take the edge off the TPC study's clearly correct finding.

This is a good example of why I wouldn't want to be a policy advisor in a presidential campaign. But I suppose that is a matter of personal taste.

Wednesday, August 01, 2012

The Tax Policy Center has just issued two excellent new reports, both with Bill Gale as co-author or sole author. Since Bill will be my colleague at next year's Tax Policy Colloquium, readers are advised to discount accordingly, if they are so minded.

First, On the Distributional Effects of Base-Broadening Tax Reform (co-authored by Gale with Samuel Brown and Adam Looney) evaluates the distributional effects of a base-broadening, revenue-neutral income tax reform, such as the one that is hinted at in Romney's tax plan. The paper finds that "any revenue-neutral individual income tax change that incorporates the features Governor Romney has proposed would provide large tax cuts to high-income households, and increase the tax burdens on middle- and/or lower-income taxpayers." Indeed, about 95% of individuals would get a tax increase from the Romney plan, if one is willing to credit it (despite the lack of detail) with being actually revenue-neutral.

This finding comes as no surprise. Indeed, it is completely inevitable when one looks at the generally falling ratio of tax preferences to income as the latter heads towards stratospheric levels. (For example, if a homeowner's income goes up tenfold, he or she would be unlikely to move to a house that was ten times as expensive, and thus to claim ten times the previous home mortgage interest deductions even if there were not a statutory ceiling on the loan principal that triggers deductions.)

I have elsewhere expressed great skepticism about the current desirability of 1986-style tax reform, in which the revenue gain from base-broadening is given away to pay for lower individual income tax rates given our long-term fiscal issues and the staggering rise in U.S. inequality over the last 30-plus years. I view the report as confirmatory of my skepticism about the 1986-style approach (which I call a "good idea whose time has passed"), unless one happens to like the distributional outcome of favoring the people at the very top relative to everyone below them.

But then again, I do not believe that Romney, even with Republicans controlling both houses of Congress, would pass a revenue-neutral plan. Instead, I would expect the legislation to lower rates significantly, broaden the base only modestly, lose a great deal of revenue, and give people at the top a huge windfall while those at the middle lost little or nothing, at least so far as current-year tax liability was concerned.

The second new Tax Policy Center report, with Gale as sole author, is called The Fiscal Cliff? Let's Pass Right Over It. Here the argument is that the 1/1/13 "fiscal cliff," in which taxes go up with the expiration of the Bush tax cuts and automatic spending cuts begin, is actually good long-run policy, at least compared to simply continuing current-year policy. As for the fact that the "fiscal cliff" changes would hurt the short-term economy, that merely calls for enacting other stimulus.

One could put this same point - clearly correct, in my view - as follows. Suppose we take allowing the fiscal cliff changes to take effect as the baseline. Against that baseline, we need stimulus. Of course, given the ongoing unemployment crisis, we already need stimulus today. But the changes would increase the amount of stimulus that is needed. Could anyone seriously maintain that, from the standpoint of optimally designing the extra stimulus, we would have it take the form of extending the Bush tax cuts, etcetera? That view cannot be seriously defended, unless one also favors them as long-term policy.

UPDATE: I see that the two presidential campaigns are sniping at each other with regard to the Gale-Brown-Looney report. Obama used it as evidence that Romney is "asking you to pay more so that people like him can get a big tax cut.” Fair enough if one ignores my surmise that in fact Romney would end up blowing a huge hole in the deficit instead. The Romney campaign replies by disparaging studies from "liberal" groups, but wisely refrains from contesting the report directly.

FURTHER UPDATE: What would be a better defense of the Romney plan (assuming it actually to be revenue-neutral as enacted)? It would have to emphasize the efficiency and growth benefits of lower marginal rates, both in general and at the top end of the income spectrum. Note, however, that constant revenue would imply that average tax rates didn't change overall, which in turn would mean that incentives to earn and save would not increase as much as one might have thought from looking purely at the marginal rate changes.

About Me

I am the Wayne Perry Professor of Taxation at New York University Law School. My research mainly emphasizes tax policy, government transfers, budgetary measures, social insurance, and entitlements reform. My most recent books are (1) Decoding the U.S. Corporate Tax (2009) and (2) Taxes, Spending, and the U.S. Government's March Toward Bankruptcy (2006). My other books include Do Deficits Matter? (1997), When Rules Change: An Economic and Political Analysis of Transition Relief and Retroactivity (2000), Making Sense of Social Security Reform (2000), Who Should Pay for Medicare? (2004), Taxes, Spending, and the U.S. Government's March Towards Bankruptcy (2006), Decoding the U.S. Corporate Tax (2009), and Fixing the U.S. International Tax Rules (forthcoming). I am also the author of a novel, Getting It. I am married with two children (boys aged 16 and 19) as well as four (!) cats. For my wife Pat's quilting blog, see Patwig’s Blog.